Estate Planning Flashcards
Gift inclusion in GE
Any gift given before death will be excluded from the GE
Except 3 rule for
1) Life insurance gifted
2) Gift tax paid
3) Retained interest gift
terminable interest and is an exception for purposes of the unlimited marital deduction?
1) An interest in a charitable remainder annuity trust where the spouse is the only non-charitable beneficiary.
2) A life estate in a home where the spouse has a testamentary general power of appointment.
3) An inherited interest in a patent by a spouse. Patent ends. Like a bond.
4 ways to transfer property at death
Operations of Law - JTWROS
Contract - Life Insurance
Trust
Probate
Your client, Carlos, wants to create a testamentary trust for his two children, Ramon and Ramona. Carlos wants the trustee to be able to distribute all income annually or to accumulate income at the trustee’s discretion. Which one of the following types of trusts would meet Carlos’s needs?
A complex irrevocable trust.
The trust is a testamentary trust therefore, it is irrevocable. It must also be complex to permit the trustee discretion over distribution and accumulations. A simple trust must pay out all income annually.
intentionally defective trust, tax treatment of the trust
The income earned by the trust will be taxed to Johnny, but the trust will be excluded from Johnny’s gross estate at the time of his death.
An Intentionally Defective Trust is an estate planning tool used to freeze certain assets of an individual for estate tax purposes but not for income tax purposes. The intentionally defective trust is created as a grantor trust with a purposeful flaw that ensures that the grantor (Johnny) continues to pay income taxes, as income tax laws will not recognize that assets have been transferred away from the individual.
For estate tax purposes, however, the value of the grantor’s estate is reduced by the amount of the asset transfer.
Marge recently received an inheritance of $2,000,000 from her beloved Aunt Mildred. Marge does not anticipate needing income or principal from the inheritance. She has two children who are young adults and three grandchildren. What technique will best allow Marge to maintain control of the inheritance investments while benefiting her children and grandchildren?
A grantor trust - will not remove the assets from her estate but will allow her to control the assets during her lifetime.
A is incorrect. A Section 529 plan does not allow Marge to have complete control of all of the investments, as the investment options are limited. B is incorrect. A Crummey trust would require an irrevocable gift and would result in a gross income inclusion if she retains too much control over the trust. C is incorrect. Marge has not expressed an interest in avoiding estate or generation-skipping transfer taxes.
Justin used his own funds to create an ILIT five years before his death. The insurance was paid to the trustee after Justin, the insured, died. Justin’s spouse, Jill, received trust income for life. Jill recently died and the trust terminated and went to their children. Which of the following statements is correct regarding this arrangement?
A. The life insurance proceeds will be included in Justin’s gross estate.
B. The trust assets will not be subject to probate.
C. The proceeds will be included in Jill’s estate, because she had a life estate in the property.
D. The trust should direct the trustee to pay estate taxes with trust assets
The correct answer is B.
A is incorrect. Justin created the trust five years before his death. He had no incidents of ownership in the policy at his death. C is incorrect. Jill did have a life estate, but only a RETAINED life estate will cause the trust assets to be included in her gross estate. She did not RETAIN a life estate, she was GIVEN a life estate by her husband. D is incorrect. If the trust directs the trustee to pay either Justin’s or Jill’s estate taxes upon, this will cause gross estate inclusion.
CwP Company offers a 401(k) plan to all of its eligible employees. The 401(k) plan has a standard vesting schedule, and provides that employees who are age 21 or older become eligible in the plan after one year of service. If the plan becomes top heavy in the current year, CwP would most likely be required to:
A. Elect the safe harbor provision 30 days prior to the plan year end and contribute a 3% non-elective contribution or elect the safe harbor provision within 30 days of the plan year and contribute a 4% non-elective contribution.
B. Modify the eligibility requirement to eliminate the one-year waiting period.
C. File a notification of top-heavy status under ERISA Section 404(c).
D. Implement a faster vesting schedule than the one currently utilized in the plan.
The correct answer is A.
Plans are allowed to be amended to become nonelective 401(k) safe harbor plans at any time before the 30th day before the close of the plan year; also they are allowed to be amended to become nonelective 401(k) safe harbor plans after that date if the plan is amended to provide a nonelective employer contribution of at least 4% of each eligible employee’s compensation and the amendment is made by the last day for distributing excess contributions for the plan year (generally, the last day of the next plan year); (SECURE Act 2019)
B is incorrect. A top-heavy plan can still impose a one-year waiting period before an employee is eligible to participate in the plan.
C is incorrect. There is no such requirement.
D is incorrect. Standard vesting schedules for a profit sharing plan that is not top heavy (3-year cliff or 2-6 year graded) are acceptable for a profit sharing plan that is top heavy. Therefore, no change is required.
A correct statement regarding a grantor retained annuity trust (GRAT) is that they are most effective when interest rates:
A. Decrease during the term of the trust.
B. Are low in the month the trust is established.
C. Are high in the month the trust is established.
D. Increase during the term of the trust.
When IRS interest rates are low at the time the GRAT is established, the gift tax value of the remainder interest is reduced to reflect the increased value of the fixed annuity. The value of the remainder interest is determined by reference to the Sec. 7520 rate for the month in which the valuation date occurs. The lower the Section 7520 rate, the more advantageous the GRAT.
Subsequent increases or decreases in interest rates after the GRAT is established are not relevant to the GRAT.
John and Jane own a tract of land in South Carolina as Joint Tenants with Rights of Survivorship. John and Jane are not married. Jane’s will leaves all of her assets to her cousin at the time of her death. Assuming John paid the entire purchase price of the land, and Jane dies first, which of the following statements is correct?
A. Jane’s share of the land will pass to her cousin, based on the provisions of her will.
B. The land will receive a full step-up in basis regardless of the portion included in Jane’s gross estate.
C. Jane’s gross estate will include 50% of the date of death value of the land.
D. Jane’s gross estate will include 100% of the date of death value of the land unless it can be proven that John paid for the property.
The correct answer is D.
A is incorrect. Since the land is owned as JTWROS with John, Jane’s interest in the property will automatically pass to John by operation of law at the time of her death. B is incorrect. Only the portion of the land that is included in Jane’s gross estate will receive a step-up in basis. C is incorrect. Jane’s gross estate should not include any portion of the land. However, it must be proven that John paid the purchase price.
Steven created and funded a trust for the benefit of his two children, Sally (age 30) and Margaret (age 26). The trust document indicates that all income from the trust will be paid equally to Sally and Margaret for their lifetimes, with the remainder of the trust to be distributed to their issue. Steven retained the power to revoke the trust, with the unanimous consent of Sally and Margaret. Which is correct regarding the income and estate tax consequences of this arrangement?
A. The trust income will be taxed to Steven, and the trust principal will be included in Steven’s gross estate at the time of his death.
B. The trust income will be taxed to the trust, and the trust principal will be excluded from Steven’s gross estate at the time of his death.
C. The trust income will be taxed to Sally and Margaret, and the trust principal will be included in Steven’s gross estate at the time of his death.
D. The trust income will be taxed to Sally and Margaret, and the trust principal will be excluded from Steven’s gross estate at the time of his death.
The correct answer is C.
Generally, a retained power on the part of a grantor, such as the ability to revoke the trust, will cause the trust to be taxed as a grantor trust (meaning the grantor will pay tax on all trust income). However, because Steven must obtain unanimous consent from an adverse party (Sally and Margaret) before revoking the trust, the trust will not be considered a grantor trust. Since the trust will distribute all income to the beneficiaries, and the trust is not a grantor trust, the income will be taxed to the beneficiaries (Sally and Margaret) each year.
For estate tax purposes, the ability to alter, amend, or revoke the transfer will cause inclusion in the grantor’s gross estate, regardless of whether the power is exercised alone or in conjunction with any other person. Therefore, the trust principal will be included in Steven’s gross estate at the time of his death.
Jim died last year. Which of the following gifts, made by Jim before his death, will be included as an adjusted taxable gift when calculating his tentative tax base for estate tax purposes?
A. Publicly-traded common stock worth $80,000 gifted to Tom in 1975.
B. A $400,000 life insurance policy on his life gifted to Mary three years before Jim’s death. The policy was worth $30,000 on the date of the gift.
C. $50,000 cash gifted to Jim’s cousin in 1997 to help him start a new business.
D. Tuition payment of $30,000 made in 2005 for the benefit of Jim’s grandson. The payment was made directly to the university.
The correct answer is C.
A is incorrect. Only post-1976 taxable gifts are included in the determination of adjusted taxable gifts.
B is incorrect. Since the life insurance policy was gifted three years prior of Jim’s death, the policy death benefit will be included in Jim’s gross estate. Property included in the gross estate is excluded from treatment as an adjusted taxable gift.
D is incorrect. Tuition payments made directly to the education provider are not considered gifts (they are qualified transfers), and therefore are excluded from treatment as an adjusted taxable gift.
Dave, who had never married, died last year. Two years before his death he paid gift tax of $15,000 as a result of gifting stock worth $40,000 to Tom and a $400,000 life insurance policy on his life to Stacy (policy was worth $5,000 at the time of the gift). How much will be included in Dave’s gross estate as a result of these gifting transactions?
$415,000.
Dave transferred ownership of an insurance policy on his life within three years of death. Therefore, the entire death benefit of $400,000 will be in his gross estate. In addition, gift taxes paid within three years of death are included in the gross estate. The gift of stock will not be included in the gross estate.
David is married, and has two children and four grandchildren. He wants to create an ILIT, in which the trustee would purchase a new second-to-die whole life policy insuring the lives of both David and his wife, Katie. The annual premium on the policy will be approximately equal to $120,000, and the trust would be designed to benefit all of his children and grandchildren equally after David and Katie are gone. From a gift tax standpoint, the best strategy for David this year is to:
A. Elect to split gifts with Katie, provide each of the six beneficiaries with 30-day lapsing Crummey powers equal to $20,000, and name the grandchildren as contingent beneficiaries.
B. Give each of the six beneficiaries a 60-day Crummey withdrawal right equal to the gift tax annual exclusion of $15,000, include “hanging” withdrawal powers in the trust document for excess gifts, and avoid the gift splitting election.
C. Provide each of the six beneficiaries with a 30-day lapsing 5-and-5 power, as well as a testamentary limited power of appointment of $15,000 each and elect to split gifts with Katie.
D. Make a qualified terminable interest property election equal to the annual exclusion, give a 5and-5 lapsing power to the two children, and provide the four grandchildren with a lapsing Crummey power.
The correct answer is C.
Gift tax complications may arise if an ILIT has multiple beneficiaries. If a Crummey power lapses, beneficiaries of an ILIT will have made gifts to each other, and these gifts are future interest gifts that do not qualify for the gift tax annual exclusion. The 5-and-5 rule generally exempts the first $5,000 of Crummey power per year from gift tax consequences. Therefore, each of the beneficiaries should be provided with a 30-day lapsing 5-and-5 power, which will allow for an annual exclusion against the gifts in the amount of $5,000 for each beneficiary.
However, since the annual premium is $120,000, a gift of $20,000 ($120,000 premium divided by 6 beneficiaries) will be made by David each year to each beneficiary. Since only $5,000 of each gift will be eligible for the gift tax annual exclusion (because of the 5-and-5 power), David will need to implement additional planning to make the additional $15,000 gift ($20,000 less $5,000) to each beneficiary eligible for the annual exclusion.
David and Katie should elect gift splitting, as that will enable the annual exclusion to be doubled for each beneficiary. In addition, David should provide for non-lapsing testamentary limited powers of appointment of $15,000 to each beneficiary, which will allow the full amount of each gift to be eligible for the annual exclusion.
overqualified
the estate is said to be overqualified.
When a decedent’s taxable estate is less than the applicable estate tax credit equivalency because of the overuse of the marital deduction,
